Archive for December, 2008

Federal Open Market Committee voted

Tuesday, December 16th, 2008

Today the members of the Federal Open Market Committee voted unanimously to cut the official Fed Funds target rate by -.75%, adding it would actually be allowed to float between .25% and zero. They also said rates would be kept low “for some time.” By essentially pegging this rate at zero, the Fed seems to be admitting this tool of monetary policy is now exhausted, and new initiatives will need to be employed. The actual rate has been trading at levels well below the Fed’s target for some time, and today’s capitulation in effect allows policy to chase reality downward toward parity. The central bank signaled they could continue to maintain an aggressive policy by using “all available tools” to spark the economy, adding they were “evaluating the potential benefits of purchasing longer-term Treasury securities.” According to Standard & Poor’s Market Watch, some economists said this approach might stave off a recession by “using the power of the printing press” to increase the money supply. This observation, in turn, seems to have benefited gold prices which rose slightly, while causing the dollar’s value to continue its recent sharp decline. A senior official at the Fed said their economists shared the view of Wall Street‘s that the U.S. economy would continue to experience weak growth until sometime after next year’s mid-point, but that deflation was not a concern. He said while current programs can be expanded, new initiatives might be brought forward as the Fed changes its strategy for monetary policy by targeting specific sectors of the debt market where spreads were considered too wide. This raises the possibility that debt rated less than AAA might possibly be purchased although this would require coordination with the Treasury Department and action by the incoming administration next year.

The equity markets broke through their declining tops line

Sunday, December 14th, 2008

The equity markets broke through their declining tops line last Monday with some conviction, then spent the rest of the week yo-yoing up and down, filling gaps, feeling around for support, and generally going nowhere. That they did this on below average volume is net positive in my view. Add another slight plus: this consolidative behavior came in the face of more bad news as the problems in Detroit have not as yet been resolved in Washington after all. Given the angle of decline this tops line demonstrates, a pull back to it, though okay from a technical perspective, would still put a substantial hit on the indices in the weeks to come. Instead, I’m currently assuming there will be an “Obama bump” in investor confidence developing in the next few weeks. Combine that with the dry tinder of massive fiscal stimulus, massive monetary stimulus, and massive amounts of cash in short-term paper with lousy yields, and we could have a bonfire erupt, taking prices much higher, probably to almost everyone’s surprise. My short-term targets remain 9,700+ on the DJIA, 1,000 on the S&P 500, and 1,785+ on the NASDAQ. If you are going to play such a possibility, be sure to set reasonable stops to protect your capital should my hunch is wrong. Serious investing doesn’t employ hunches as its main determinant, so stay true to your “risk budget” too.

U.S. households paid off more debt

Thursday, December 11th, 2008

For the first time ever recorded, and at least since 1952 when the data started being tracked, U.S. households paid off more debt than they assumed according to a recent report from the Federal Reserve. Total household debt fell -.8% annualized. But we are still on the hook for the remaining balance, estimated at some $13.94 trillion! Americans paid off more mortgage debt than they accumulated for the first time on record as well, but credit card balances and auto loans outstanding increased. Possibly, after losing some $2.81 trillion of their net wealth, individual citizens are becoming more prudent. Unfortunately, our government is headed in the opposite direction, delivering a peacetime record +39.2% hike in federal debt. This Keynesian response to our current economic woes is having its effect on financial markets. Some big holders of U.S. Treasury debt are now using a form of insurance called credit default swaps as protection against our government’s possible failure to make good on these promises to pay the loans back at maturity. The cost of these hedges is now higher for our national debt than it is for some of our blue-chip corporations like Campbell Soup or McDonald’s. That’s not too comforting, especially when we hear talk of future government stimulus packages totaling an additional trillion or more!

High rate of re-defaults on mortgages

Monday, December 8th, 2008

In his comments at an Office of Thrift Supervision National Housing Forum today, John Dugan, Comptroller of the Currency, released statistics which showed a surprisingly high rate of re-defaults on mortgages that had recently been reworked. According to the OCC statistics, for loans which had been modified in the first two quarters of 2008, approximately 56% had again fallen behind after six months, and after just eight months over half, 58%, had re-defaulted. While not all these re-defaults will necessarily result in foreclosure, Dugan acknowledged the numbers were very high. Separately, New Jersey Gov. Jon Corzine called for a short-term (3 to 6 month) time-out on foreclosures, adding, “We need a bottom up approach to modifying mortgages one home at a time, It’s going to be messy but you got to get on the ground level.” He recommended government officials consider an approach like the one Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., suggested, using $24.4 billion of the federal government’s $700 billion Troubled Asset Relief Program to modify loans. It’s hard for me to see how such a time-out will benefit the investors who originally loaned the funds, and now may be wondering about the status of these assets. Remarks at the same meeting by Donald Kohn, the Federal Reserve’s vice-chairman, suggested banks have been reluctant to lend in this environment despite increasing pressure to do so, saying “In recent weeks, bank lending appears to have dropped back, consistent with the significant tightening of terms and standards reported by bank loan officers in recent quarters, as well as the weakening of economic activity.” Given the track record of those loans that have already been renegotiated, it’s easier for me to sympathize with the banks this time.

John Dugan released statistics

Monday, December 8th, 2008

In his comments at an Office of Thrift Supervision National Housing Forum today, John Dugan, Comptroller of the Currency, released statistics which showed a surprisingly high rate of re-defaults on mortgages that had recently been reworked. According to the OCC statistics, for loans which had been modified in the first two quarters of 2008, approximately 56% had again fallen behind after six months, and after just eight months over half, 58%, had re-defaulted. While not all these re-defaults will necessarily result in foreclosure, Dugan acknowledged the numbers were very high. Separately, New Jersey Gov. Jon Corzine called for a short-term (3 to 6 month) time-out on foreclosures, adding, “We need a bottom up approach to modifying mortgages one home at a time, It’s going to be messy but you got to get on the ground level.” He recommended government officials consider an approach like the one Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., suggested, using $24.4 billion of the federal government’s $700 billion Troubled Asset Relief Program to modify loans. It’s hard for me to see how such a time-out will benefit the investors who originally loaned the funds, and now may be wondering about the status of these assets. Remarks at the same meeting by Donald Kohn, the Federal Reserve’s vice-chairman, suggested banks have been reluctant to lend in this environment despite increasing pressure to do so, saying “In recent weeks, bank lending appears to have dropped back, consistent with the significant tightening of terms and standards reported by bank loan officers in recent quarters, as well as the weakening of economic activity.” Given the track record of those loans that have already been renegotiated, it’s easier for me to sympathize with the banks this time.

Last Friday’s close

Monday, December 8th, 2008

Last Friday’s close saw most major indices come up against their declining tops line, with the NASDAQ, and maybe just barely the DJIA poking through. You could say the line bent, but didn’t really break. Today it ruptured, with strong advances across the board. It looks like we’re finally seeing the Obama bump as the president elect’s interview and promise of a broad domestic stimulus was apparently well received. Plus, Washington seems ready to resolve auto industry problems in Detroit with a bailout of some sort. This brings the short-term targets of 9,700+ on the DJIA, 1,000 on the S&P 500, and 1,785+ on the NASDAQ back into play. If you increase your risk budget by adding equities, be sure to keep an eye on your stop-loss points though, we are not out of the woods yet. Bonds are still a mess with most asset classes priced to disaster while treasuries confound everyone. The three-month bill went at auction today for .005%! Let me repeat, that’s an annualized yield of .00005! And testimony in Washington today discussed the high rate at which those mortgages which have been reworked this year are again defaulting. We have a lot to work through, but an occasional strong, celebratory bounce isn’t out of the question.

Major Indices Come Up

Monday, December 8th, 2008

Last Friday’s close saw most major indices come up against their declining tops line, with the NASDAQ, and maybe just barely the DJIA poking through. You could say the line bent, but didn’t really break. Today it ruptured, with strong advances across the board. It looks like we’re finally seeing the Obama bump as the president elect’s interview and promise of a broad domestic stimulus was apparently well received. Plus, Washington seems ready to resolve auto industry problems in Detroit with a bailout of some sort. This brings the short-term targets of 9,700+ on the DJIA, 1,000 on the S&P 500, and 1,785+ on the NASDAQ back into play. If you increase your risk budget by adding equities, be sure to keep an eye on your stop-loss points though, we are not out of the woods yet. Bonds are still a mess with most asset classes priced to disaster while treasuries confound everyone. The three-month bill went at auction today for .005%! Let me repeat, that’s an annualized yield of .00005! And testimony in Washington today discussed the high rate at which those mortgages which have been reworked this year are again defaulting. We have a lot to work through, but an occasional strong, celebratory bounce isn’t out of the question.